This guide was last updated in August 2011.
A break clause is a term in a tenancy agreement that allows a tenant to leave before the tenancy period comes to an en. Break clauses are a continuous source of litigation in the real estate sector: the landlord wants to maintain an income stream while the tenant wants to avoid future liability. A tenant's failure to comply with the terms of a break clause can give a landlord the opportunity to contest the break and can have serious cost consequences.
This guide provides some key points for tenants who want to avoid common traps.
Drafting and serving the break notice
- a break clause will be strictly construed - if a lease were to state the break notice should be sent on pink paper, then a notice on blue paper will be invalid;
- check the title and the names of the parties – if the notice could mislead a reasonable recipient then it may be subject to challenge;
- check the service of notice provisions in the lease – email and fax are not appropriate unless expressly permitted;
- also serve notice on agents – in a recent case, an agent accepted a notice for the landlord and it was held that the notice was validly served;
- obtain evidence of service from a professional process server.
- give the right amount of notice – there may be more than one interpretation as to the correct timing, in which case more than one notice may be required;
- service on a working day and during office hours is preferable - only serve at other times if strictly necessary.
Complying with preconditions by the break date
Sometimes, the lease will specify certain conditions which must be complied with at the break date for the break to take effect. The most common preconditions are:
- payment of rent - check the definition of rent in the lease. Ask the landlord if all sums have been demanded, and request written confirmation of this position. Note that where the break falls between rent payment days, a full quarter's rent will be payable unless an apportionment clause clearly applies;
- material compliance with covenants – this onerous precondition can be difficult to comply with. Compliance will be judged objectively, and with reference to the nature of any breach;
- vacant possession – ceasing to occupy is not enough to comply with this condition. Fixtures, goods and any subtenants should be removed, as these could constitute a substantial impediment to the use of the property. Hand back all keys before the break date.
Negotiating an exit agreement with the landlord
- invite discussions on a without prejudice basis to agree an exit - including the condition in which to leave the premises, the settlement of any claims and waiver of any preconditions;
- notify the landlord of the intention to remove any valuable alterations - if the lease permits this – as a negotiating tool;
- assist with remarketing to give the landlord less incentive to contest the break;
- prepare for strict compliance with the break conditions in the event that discussions do not result in a binding exit agreement;
- obtain early legal advice, and approach the landlord well in advance of the break date.